When will the next crisis be? 2025 — if we’re lucky

Five years into clearing up the last mess, eminent economics professor Charles Goodhart has a date for our diaries. The former Bank of England interest-rate setter is pencilling in another financial crisis in 2025.

Now approaching 80, Goodhart — speaking this week at a London School of Economics event on The Next Crisis — is worth listening to as he has been around long enough to see his fair share. He has lived through three — the secondary banking crisis of 1974-75, the 1990-91 recession and the most recent 2007-08 near-death experience.

He is unlikely to make the next one, as he admits, but based on the current pattern he thinks the next storm will hit in 2025 or 2026 as a 17-year cycle repeats itself — driven, as he puts it, by “bog standard bad retail banking, commercial property and massive credit expansion”. The UK is apparently more crisis-prone than other developed economies in the OECD, which hit the rocks every 42 years on average. In the professor’s view, after five years recovering from the shock, there’s about eight years of pretty steady recovery where property prices rise faster than inflation — and then another three or four years during which the “wonderkids” who made money for the banks in the steady recovery period are now in charge and they keep on doing what they’re doing, leading to disaster.

He is fairly dismissive of some measures introduced to ward off further turbulence, such as Sir John Vickers’ ring-fencing of retail banking — arguing that this may exacerbate future risks because the lion’s share of their business will be in lending to property in one way or another.

“We’ve not got to the end of crises,” he predicts. There are also risks around financial innovation when products designed for hedging, such as credit default swaps, are used in speculation. As former US Federal Reserve chairman Paul Volcker says: “The only useful banking innovation was the invention of the ATM.”

But Goodhart may be a little too optimistic in forecasting 2025 for the next crisis. It seems a shame to strike a flat note in a week in which the UK economy is growing at its fastest pace since 2007, but there are a few possible candidates for trouble far sooner than that. We’ve already got another embryonic property boom at home. Abroad, investors are turning on emerging markets as the Fed tapers its money-printing programme, forcing central banks to stem runs on their currencies.

And what about a European banking crisis? The eurozone’s banks are subject to an “asset quality review” this year, a stress test that is meant to reassure investors about their balance sheets. Analysts at Royal Bank of Scotland say they could have to raise as much as €500 billion (£411 billion) in extra capital. A single resolution fund that banks will pay into over the next 10 years to wrap up failing banks was agreed in December. But at €55 billion, it looks a woefully inadequate backstop — thanks to German intransigence — and individual governments will still be on the hook.

Banks in Spain and Italy have been using cheap European Central Bank funds to load up on national debt for the past few years, depriving businesses of credit, while reinforcing the “doom loop” between weak banks and weak sovereigns. These bonds have risen in value thanks to European Central Bank president Mario Draghi’s “whatever it takes” pledge to prop up the euro in 2012, generating easy profits for now.

When these bonds fall in value, it’s a different story, leaving the bank — and the national — balance sheet exposed. It is hard to avoid the fear that there’s an almighty mess brewing on our doorstep.